Top Questions Business Owners Have about E&O Insurance and Where to Buy It
As an insurance or financial-services business owner, it’s fair to assume you’re pretty sophisticated in your understanding of insurance. You’ve likely sold life insurance, health insurance, annuities, or property-casualty insurance in the past. You definitely know your way around a specimen insurance policy. However, we’ve found that agents and advisors often know more about the insurance they sell than the coverage they buy. This knowledge gap can really hurt if they fail to buy the wrong kind or amount of insurance.
To avoid such problems, here are answers to four questions that trip up insurance agents looking for E&O insurance.
- Do I really need E&O insurance?
It’s hard to believe, but many insurance entrepreneurs have trouble with this question. Why? Because they don’t feel at risk. They believe their knowledge and skills are sound and that their business practices are both ethical and compliant. They think this immunizes them against lawsuits. What’s more, they have great confidence in their ability to read human nature and avoid troublesome clients. Given these beliefs, agents often conclude they have no need for E&O insurance and that buying it is a waste of money. But just as smokers often think cancer always happens to someone else, until it happens to them, insurance professionals assume they’re immune to getting sued . . . until they get sued. At that point, it will be too late to transfer their legal exposure to an insurer via E&O insurance. You can read the benefits of being covered by E&O insurance here.
- How much E&O insurance should I purchase?
Insurance agents who typically advise their clients to load up on as much life insurance or personal liability coverage as possible are often the first to skimp on their E&O insurance. Perhaps it’s because they feel immune to lawsuits. Or maybe they get more satisfaction from spending money on more appealing things like new cars, vacations, or hobbies. Compared with these choices, buying E&O insurance can seem mundane.
Whatever the reason, insurance agents often skimp on their own E&O insurance instead of buying more than they need, even though the cost difference between the latter and the former may be minimal. Our recommendation: be realistic and purchase the most E&O insurance you can reasonably afford.
- What type of E&O insurance should I buy?
At first blush, deciding on the type of E&O insurance to buy is much easier than deciding on the best form of life insurance. That’s because there are only two issues to consider. First, make sure the policy is written for your specific professional duties and regulatory license. If you’re a life/health insurance agent, then you want to buy a policy designed with your life insurance sales and service duties in mind. How to determine? Request (or download) a specimen policy and then read the insuring clause to see if all your duties are listed. If one or more are not, look for a policy with more comprehensive coverage.
Second, determine whether the policy is a claims-made policy form or an occurrence form. With a claims-made policy, the coverage in force at the time you file a claim will be the one that shields you, not the one in effect when the precipitating incident occurred. With an occurrence policy, the coverage is determined by the date of the incident, not the date of the claim.
Two lenses through which to view the claims-made vs. occurrence issue are breadth of coverage and cost. Claims-made policies will pay benefits only when claims are reported while the policy is in force. If you drop your policy and a claim arises later, you will be left unprotected, unless you purchase so-called extended reporting period. Also, if you had a coverage gap at any point in the past, a claims-made policy will only protect you back to the point at which you dropped your coverage, but not before the gap. To cover that prior period, you will need to buy prior-acts coverage.
Occurrence policies, on the other hand, have the benefit of simplicity. They protect your actions during a given policy year in perpetuity, even if you drop the policy. You don’t have to worry about buying ancillary protection for gaps either before your coverage kicked in (“nose” coverage) or after you dropped it (extended reporting period or “tail”). However, since occurrence policies don’t have gaps and provide separate coverage limits for each year the policy is in force, the protection is much broader and therefore more expensive than claims-made policies are. Which is right for you? If you prefer simplicity and more comprehensive protection, despite higher costs, then consider buying an occurrence E&O insurance policy. If you would rather save money and are confident you won’t have a coverage gap, then opt for a claims-made policy form.
- From where should I buy my E&O insurance?
The answer depends on whether you want to buy E&O insurance through a broker or whether you’re comfortable buying it online. The former approach might be warranted if you have a large agency and/or you’re involved with many types of financial services or risky ones such as alternative investments. To scope out your exposures, consult with an experienced E&O insurance broker. Working with such a person also gives you access to more insurers. If your situation is unique or highly risky, having a broker shop it around can help you find the right insurer and coverage at an affordable price.
However, if you have a simpler business and only sell low-risk products, consider buying from an online provider such as EOforLess. EOforLess offers E&O options for various types of financial professionals. As long as you verify that the policy covers your specific job activities, buying online can save you a lot of time and money. In fact, EOforLess allows you to establish an account, submit an application, pay for your policy, and click and bind your coverage within just a few minutes of arriving on our site. For busy agents with simple needs, online buying is usually the way to go.
In conclusion, if you’re shopping for E&O insurance, stay focused on the big-picture issues we’ve discussed in this article. But here’s the most important point of all. When considering what to do about your professional liability risks, just follow the advice you give your clients. Understand your risk exposure, match it to appropriate and cost-effective insurance, and keep your policy in force at all costs. Follow this advice and you will be in great shape with your E&O insurance today and for decades to come. Good luck!